Finance Mezzanine

Mezzanine Financing is a type of hybrid financing involving both debt and equity instruments. It is also known as subordinated financing. Mezzanine Financing is useful for small to medium enterprises seeking additional capital for further expansions.



In Mezzanine Financing the lender lends the borrower the required amount of funds and the company is also required to issue shares to the lender. The lender's debt (Mezzanine debt) has a claim on the company's assets only after the secured debt's claim to the assets in case of liquidation of the company. Mezzanine Financing usually uses unsecured debt and/or preferred/preference shares or equity shares for financing the borrower.



Mezzanine Financing is advantageous to the borrower as even if he has to issue shares to the lender he does not loose overall control of the company. Besides the mezzanine financing is a type of long term financing project then a short one, so the lender is not looking to make a quick exit. Mezzanine Financing also helps to increase the value of the stock. Mezzanine Financing is useful in times when the borrower cannot secure the required funds from a bank.




Also in most cases of Mezzanine Financing repayment of the debt is at the end of the term instead repaying throughout the term of the loan thereby avoiding strain on the cash flow of the borrower. In case the debt cannot be repaid the borrower can get the debt converted to shares if the agreement provides for the same.



The capital structure in Mezzanine Financing can be optimized by a variety of different capital structures. The capital structure is optimized by using asset backed debt, mezzanine debt and equity shares thereby reducing the cost of equity shares as the cost for the debt is more than that of equity capital. Also instead of issuing equity shares to the lender the borrower may also be asked to issue preference shares to improve their claim on the assets of the company and also earn a fixed rate of dividend each year, thereby securing themselves much better than in case of being allotted equity shares.



The lenders tend to charge an interest rate ranging from 13% to 20% for the debt proportion of Mezzanine Financing but some lenders seek to charge as high 25% to 30% as interest. Banks such as United Bank of Switzerland, Natwest and HSBC are know give the service of Mezzanine Financing. Though majority of the lenders of Mezzanine Financing tend to be Venture Capitalists and Private Equity Firms. One word of caution for Mezzanine Financing is that the lender may seek a clause in the financing agreement for converting the loan amount to equity shares, thereby giving the lender a chance to control the company.